Fortescue Rises to Two Month High on $500 Million Repayment

  • Debt repayments made in fiscal 2016 now total $2.9 billion
  • Iron ore supplier trimming debt under drive to lower costs

Fortescue Metals Group Ltd., the fourth-biggest iron ore supplier, will make a $500 million early repayment of a loan, extending its debt reduction drive as it seeks to lower costs amid weaker prices. Its shares rose to the highest in two months.

Perth-based Fortescue’s debt repayments since July now total $2.9 billion, reducing annual interest expenses by $186 million, the producer said Thursday in a statement. The latest repayment of part of a term loan due to mature in 2019 will be made at par from accumulated cash, the company said.

The shares rose 8.3 percent to A$3.53, the highest since April 21, to extend gains this year to 89 percent. BHP Billiton Ltd. advanced 1.8 percent and Rio Tinto Group jumped 2.7 percent.

“Fortescue will continue this positive journey, there’s more to come on debt reduction as they’re building another big pot of cash,” Peter O’Connor, a Sydney-based analyst with Shaw and Partners Ltd., said by phone. “Fortescue’s share price will rise in the next year or two even if the iron ore price does nothing, just as they continue the deleveraging.”

The biggest producers have been slashing costs as iron ore prices have tumbled to three straight annual declines. Fortescue reduced its C1, or cash costs, -- a measure that includes charges for mining, processing and rail and port transport -- by 43 percent to $14.79 a wet metric ton in the three months to March 31, compared with a year earlier, and is targeting a rate of $13 a ton by the end of his month.

Interest charges account for about $3.20 a ton of Fortescue’s $28.80 breakeven price, the producer said in February. Cutting interest charges is among the key tools available to Fortescue to continue to reduce costs, Chief Financial Officer Stephen Pearce said in an April interview. Fortescue’s net debt stands at $5.9 billion, it said in a presentation last month.

The price of the producer’s largest outstanding bond, its March 2022 U.S. dollar note, climbed to a record 108 cents on the dollar on Wednesday, according to Trace pricing. It yielded 7.68 percent, or 653 basis points, more than Treasuries.

Iron ore with 62 percent content rose 2.8 percent to $52.29 a dry ton on Wednesday, according to Metal Bulletin Ltd. data. The raw material has slumped about 26 percent since April, when it reached $70.46 a ton, the highest price since January 2015.

(An earlier version of this story corrected details of share price move in first paragraph.)

Before it's here, it's on the Bloomberg Terminal.